Business Finance

Published on March 2017 | Categories: Documents | Downloads: 80 | Comments: 0 | Views: 426
of 2
Download PDF   Embed   Report

Comments

Content


BUSINESS FINANCE-1
PREPARING FORCASTED FINANCIAL STATEMENTS
Q. Stevens Textile’s 2009 statements are as follows: (millions of dollars)
Cash $400 Accounts Payable $250
Receivables 605 Accruals 275
Inventories 495 Notes Payable (5%) 250
Total Current Assets 1500 Total Current Liabilities 775
Long-term Debt (12%) 400
Net Fixed Assets 2000 Common Stock 1000
Premium on Common Stock 655
Retained Earnings 670
Total Assets $3500 Total Debt and Equity $3500

Sales 800
Cost of goods sold 320
Gross profit 480
Selling expense 100
Depreciation 125
Operating income 255
Interest 60.5
Taxable income 194.5
Tax expense 58.35
Net income 136.15

 Stevens expects its sales quantity to increase by 10% and expects a 5% rise in the selling
price of its products. The company’s is expecting an increase of $10 million in its selling
expense.
 The company is planning to adopt an aggressive planning policy to speed up the
collections; the receivables are expected to increase by 10% for the next year. Company
expects its other current assets and operational current liabilities to increase
proportionately with sales.
 The company expects to achieve a gross margin of 62.5%, current ratio of 1.75, debt-
asset ratio of 40%.
 Currently, the company is using its fixed assets at maximum capacity. Net fixed assets
have a remaining life of 16 years with zero salvage.
 The machine required for manufacturing company’s product is available at a cost of
$500 million (including installation costs) and will be depreciated using straight line
depreciation over a period of 15 years and with a salvage of $50 million. Though this
machine will be operating at 40% of its capacity but based on the sales forecasts over a
10-year period, this investment has a payback period of 6 years. The machine will be
purchased at the beginning of 2010.
 The company is able to maintain 65% of dividend payout ratio for the last three years.
For the year 2010, the company might change its payout ratio if needed but it doesn’t
want to dilute its common-equity through additional share insurance.
 Tax rate will remain same for 2010.

Requirements:
1. Ignoring the financing feedback, will the company be able to maintain its payout ratio at
65%. Prepare the forecasted income statement and balance sheet for Stevens. (Hint:
compute the amounts to be financed through notes payable and long-term debt).
2. If the new rate on notes payable is 6.5% (the existing notes are also rolled over on this
rate) and the new long-term debt can maintain to achieve its target ratios.

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close